What works in India’s favours is that most developing market economies fiscal positions have deteriorated and their debt loads have risen. As a result, India will not be a sore thumb among economies. Furthermore, rating agencies would take into account the fact, that the epidemic has increased budgetary load, and a sudden rating drop may not be justified.
Following the second wave, of India recently declared that it will expand its free food distribution programme. It also revised its decentralized immunization programme, procuring 75% of vaccines for free distribution to its populace.
As the government bear the cost of delivering free food to the most vulnerable, and free vaccines to its residents, the government’s financial health will be put under extra strain. Such initiatives may appear to add to the Centre’s budget burden, but they will provide outsized rewards in the form of improved economic growth recovery.
Economists anticipate that both of these initiatives will increase expenditures by 0.4-0.5 percent of GDP (GDP). This is a significant burden on the Centre’s already overburdened finances. According to Nomura analysts, the budgeted fiscal deficit of 6.8% of GDP will be exceeded in FY22. The government has received a larger-than-budget dividend transfer from the Reserve Bank of India, which is a silver lining (RBI). Against a planned amount of 53,500 crores, the central bank transferred a total of 99,142 crores. In addition, despite the second round of disruptions, indirect tax receipts have remained quite solid. In May, goods and services tax receipts topped $1 trillion.
The RBI has even promised to assist the government if it needs to borrow more money from the market. More importantly, the effects of rapid vaccination on growth may be able to compensate for some of the short-term financial sufferings. The speed and intensity of recovery are proportional to the time it takes to become vaccinated. As more Indians are vaccinated, the necessity for lockdowns will diminish, and economic activity will accelerate. As a result, high-frequency data from June onwards reveals increased inactivity. All of this contributes to the government’s increased tax revenue.
Meanwhile, the government must get more out of its disinvestment plan to prevent the possibility of the country’s credit being harmed as a result of its budget deficit. A rising debt burden would put the country in danger of a rating drop from rating agencies. In a note, analysts at Nomura wrote, “With India already on the verge of a rating drop, we remain sensitive to possible rating action near the year’s end or early next year, as fiscal problems become clearer.”
